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Foreign Portfolio Investment (FPI) means investment in foreign financial assets like fixed deposits, stocks, mutual funds, etc. The investors who invest in FPIs are known as foreign portfolio investors. Foreign Portfolio Investors passively hold their investments. The main purpose of foreign portfolio investors is to get a speculative profit without gaining control of a company and to diversify the portfolio and receive a high return for the risks borne by foreign portfolio investors. Foreign Portfolio Investment (FPIs) give investors the freedom to diversify in the international market and obtain the benefit of differences in exchange rates by allowing an investor from an economically challenged country to invest in an economically developed or developing countries having stronger currencies thereby ensuring high returns.
FPIs in India are majorly regulated by SEBI under the SEBI (Foreign Portfolio Investors) Regulations, 2019. They also need to follow the Income Tax Act of 1961 and the Foreign Exchange Management Act of 1999[1]. FPIs should be less than 10% of the paid-up share capital of the Indian company. Once it goes beyond the 10% paid-up share capital mark it is considered an FDI. If thereafter the investment falls below the 10% mark, it will still be considered an FDI. In present times, FPIs along with FDIs form the form prominent portion of foreign investments in India. Individuals, Businesses, and even Governments have started to invest in Foreign Portfolio Investments (FPIs). Hence, in this blog, we discuss the FPIs in India, their categories, benefits and associated risks.
Table of Contents
The SEBI (Foreign Portfolio Investors) Regulations, 2019 specifies three categories of FPIs in India. Every foreign portfolio investor intending to make FPIs in India should get himself registered under any of the three categories. The following are the three categories of FPIs in India:
In order to register as a Foreign Portfolio Investor the following conditions should be satisfied namely:
Often FPI and FDI are confused to alike as both are forms of foreign investments. Both form major source of foreign investment across the globe. However, they are a lot unlike than they are alike. FPIs are securities and other financial assets passively held by a foreign investor in a country. FDI is the investment made by a foreign company or a foreign individual into the business interests located in another country. A major difference between FPI and FDI is the degree of control that a foreign investor has over his investments. Under Foreign Portfolio Investment (FPI) the investor has passive ownership therefore, the degree of control is low whereas in FDI the investments are made directly by the investor so the degree of control is high. Another important difference between FPI and FDI is that in FPIs the investment is made in the financial assets of a company whereas in FDI the investment is made in physical assets of the company. As FPIs directly affect the financial market by facilitating capital inflow in a country, the risk involved is volatile. However, FDI not just leads to the inflow of capital but also technology, knowledge and other resources from the foreign country therefore, risk involved is low.
As the Indian economy is the fastest growing economy, FPIs in India serve as a lucrative option for foreign investors. Foreign Portfolio investments (FPIs) are a great investment mechanism for entry into the Indian market. Further, FPIs in India will be beneficial not the investor but also for the growth of the Indian economy. The higher the FPIs, the higher will be the stock market efficiency and the higher will be the economic growth.
Also Read: How Foreign Portfolio Investors can Invest in India?
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